Germany Lowers Retirement Age

After raising the retirement age to 67 in 2007 to encourage EU partners to do likewise, Germany has reversed course. Their story points to the many complications of the question of how long we should expect people to work.

Back in 2007, Chancellor Angela Merkel’s government voted to lift the retirement age gradually to 67 from 65, in line with policies being adopted by the United States and other countries concerned about the costs of supporting an aging population. Economists say that move not only stabilized Germany’s public pension system, but also put Berlin in a position to insist during the subsequent financial crisis that other European governments follow suit.

But now, with the worst of the economic downturn apparently past and Ms. Merkel under pressure from her left-leaning coalition partners, Germany is reversing course, loosening the rules to allow some workers to retire early but still receive their full pension benefits.

The law allowing the lower retirement age, which was passed by Parliament in May, has touched off criticism within Germany from groups concerned about the costs, especially on future generations, and drawn accusations of hypocrisy from nations forced to swallow German-imposed austerity.

“We view the early retirement at 63 as sending the wrong signal,” said Anne Zimmermann, an economist with the Association of German Chambers of Industry and Commerce.

As we’ll see, the move is very expensive and will be borne disproportionately by younger workers who are much less well off financially than the retiring seniors. And yet.

But the change in policy has also proved popular with Germans like Frank Fischer. Mr. Fischer, 63, the superintendent of a nursing home on the outskirts of Berlin, took sick leave last year for the first time in more than four decades when he developed a knee problem, which he took as a sign he had worked long enough. Although leaving the work force before he reached full retirement age meant a smaller pension, he figured it was still worth it.

The new law, which allows anyone who has paid into the state pension system for at least 45 years to retire two years early but still receive full benefits, made his decision easier. In June, Mr. Fischer completed his application to retire in January, when he plans to devote his time to his family, his garden and his dream of traveling the world. Right now, early retirement begins at 63, but that will increase to 65 as the higher retirement age is phased in.

“I have seen what happens to people when they are old and infirm, when all the money in the world can’t improve your quality of life,” Mr. Fischer said after handing in his application. “I wanted to go while I can still enjoy it.”

I’m 48 and, barring major health setbacks—or, you know, death—I fully expect to continue working until my full retirement age at 67. Quite possibly well past it. My boss, who’s 20 years older, just signed up for another four years. But we’re academics whose job requires nothing more physically strenuous than standing to give a lecture and tromping the terrain at Gettysburg once a year.

My dad didn’t quite make it to 67. My mom’s 71 and in poor health. I’m very sympathetic to Mr. Fisher and his desire to go out while he can enjoy his well-earned leisure years. Germany is in a position to give a damn.

While an estimated 6,000 Germans like Mr. Fischer have already applied to take advantage of the early retirement law, which takes effect on Tuesday, the move has been sharply criticized as Germany grapples with an aging population and a shrinking work force and promotes austerity among its hard-pressed European Union neighbors.

Greece and Italy have introduced changes to their pension systems within the past three years that foresee gradually increasing the retirement age of men and women to 67 over the next decade. Countries like Greece have been under pressure to take any steps possible to reduce costs.

“Greece won’t be in a position to take this kind of action for at least 10 or 15 years,” said Savas Robolis, a labor market expert at the Greek General Confederation of Labor, the country’s main trade union.

Even for Germany, there’s real question about the impact of the move:

Some analysts say that a higher retirement age contributes to youth unemployment, which is widespread in many parts of the European Union. In the case of Germany, which has the reverse problem of finding enough qualified young people to fill jobs, the greater worry is pushing the cost of early retirement for workers like Mr. Fischer onto the next generation.

“We see this move as inconsistent with the German position to stabilize the social system,” Ms. Zimmermann said. “In dealing with our European partners, we pointed to our decision to raise the retirement age to 67, which projections have shown helped to improve the public retirement fund. Now we are going against that.”

When older people leave the work force early, they take with them a wealth of skills that can be useful in shaping a company’s future. Especially in the many smaller and midsized companies that have fewer employees, older workers can play an important role.

“If someone has worked at a company for 45 years, they are most likely highly qualified, and there should be incentives to keep them there until full retirement age,” said Bert Rürup, president of the Handelsblatt Research Institute.

Andrea Nahles, Germany’s labor minister and a member of the Social Democratic Party, which campaigned on the promise of early retirement for longtime workers, repeatedly called the new law a matter of justice for near-retirees who had been working since their late teens. Under Germany’s apprentice system, many young people leave school after the 10th grade and receive training on the job, accompanied by classroom learning.

Most of the 200,000 people who the German government estimates could initially qualify for early retirement are likely to have physically demanding jobs. Mr. Fischer, for example, drove trucks for more than 20 years, more than half of that time for a plumbing company that required him to handle heavy pipes and equipment.

“We are creating more equality for those who have worked long and hard toward our quality of life,” Ms. Nahles told lawmakers in May.

Which points to something obvious that I’m been arguing for years: a single retirement age for everyone seems fair on its face but is absurd upon even some real examination. If your job requires constant physical toil—or, frankly, is just mindnumbingly boring—every year beyond 50, certainly 60, is torture. And the notion that seniority means having a fount of wisdom that the company can’t live without is true only for a relative handful of jobs.

But, again, there’s a hell of a balancing act:

The government has estimated that the whole retirement package, which includes benefits for women who had children before 1992, will cost 4.4 billion euros, or $6 billion, this year, increasing annually to €11 billion, or $15 billion, by 2030. The costs of the early retirement, estimated to grow over the next decade to €3 billion from about €1 billion, or to $4.1 billion from $1.4 billion, are to be absorbed by the pension fund.

While the government’s pension fund has enough reserves to cover the initial years, eventually those who are still employed will have to pay more into the system. This has angered younger Germans. Student groups and youth wings of the political parties were among those who protested against the law.

“We see a discrepancy between the investment in the older generation and the burden being placed upon the younger generation, which needs to be brought into balance,” said Marcel Escher, 28, who heads the Bavarian branch of the conservative R.C.D.S. student organization. “At the end of the day, we are the ones that will have to pay for it.”

Then again, as noted earlier in the piece, later retirement means fewer jobs for those young people—and fewer opportunities for promotion for those in mid-career. And Germany would seem in a relatively good position to absorb the costs:

The Federation’s spending in 2014 will total €298.5 billion, with net borrowing amounting to €6.5 billion. This is the lowest level of new borrowing in 40 years.

Certainly, Fischer is on board:

Asked whether he worried about the future of his daughter, a young mother who is working and raising his grandchildren, ages 2 and 7, Mr. Fischer shook his head. “I tell her to start saving and planning for the future,” Mr. Fischer said. “That’s what I did.”

Most of Germany’s EU neighbors don’t have this luxury. Their economies are much weaker, they have a larger percentage of young people, and fewer jobs to go around. Which means their 66-year-old truck drivers with bad knees will have to do the best they can.

Comments

A different way to view the issue is what is the maximum percentage of GDP that a country can spend on caring for its retired population. Whether it is tax funded pensions or private savings, if the retired elderly control an ever growng percentage of a countries wealthy, what are the effects on everyone else.

The scenario of people retiring at 65 and heading off to their sailboat, golf courses, fishing pond, or
art studio (a while back some misguided politicians told people to quit work and follow your dream) is not in the cards for most people. Many are still paying mortgages. Many are helping their children and grandchildren. Some are even buying newer, larger homes. And the realities of higher living costs: ever increasing food prices, gas, utilities, and many other items. So most keep working in some area, even if it is part time. Such is the economic landscape these days. I see many seniors working in stores, theaters, theme parks. Some remain at their regular jobs. Most are not going to have a huge retirement fund. Many retirement funds went down or out in the recession and the current economy.
But this is not a bad thing. Health professionals and doctors are telling people to stay active, keep moving. Don’t just sit on the couch watching “The Price Is Right”, “Springer” , or CNN (that is sure to turn a persons mind into a brick). Keep moving, stay fit is what they are telling people.

It seems to me that it’s difficult to compare retirement ages in countries that have rising real median household incomes (like Germany) with those in which real median household incomes are flat (like the U. S.) or falling (Greece).

Add to that the demographic differences between the elderly here and the young here and it seems to me that talk of lowering the U. S. retirement age is fraught with political problems. Do we really want to be a country in which relatively poor young people of Hispanic descent are being taxed at confiscatory rates to pay for the retirements of elderly people of western and northern European descent?

James points out a significant issue: the differences in what it means to be 60 or 65 or 70 when you’ve worked as a coal miner all your life or worked as a doctor, lawyer, or university faculty.

The solution I’ve proposed for that is to increase the SSRA but create a new status between disability and Social Security to account for that difference. Sadly, that would require a drastically different politics than prevails now.

I don’t believe it’s possible for most people to save for an adequate retirement, the preferred solution of libertarians and small government conservatives. I wrote a lengthy post on this subject several years ago. That was before we’d had interest rates below 2% for the greater part of a decade. My argument is that much stronger now.

@superdestroyer: How laughable it is that you attempt to make this about what the government can afford. The real answer is that the government should simply print as much money as is needed for people to live on and distribute that to everyone.
The only reason we do not print the money required to do all the things that the government wants to do right now is GOP obstructionism. Printing limitless amounts of cash will never have any effect on the value of the dollar.

That’s not the question — the question will be, increasingly, how long do we need people to work? In an age of increasing automatization, robotics, drones, and myriad as yet unforeseen computer advances, a lot of the jobs that now need doing will just disappear. We’re heading into a post-scarcity economy (reserving the impact of trends such as climate change, etc.) and may have to rethink the relation of money to labor. If we don’t need everyone to work, should we just start to guarantee those whose labor is no longer needed a certain minimum income?

Or, to put it in simpler terms, if a hundred years ago the labor of 100 people was needed to support 100 people, and tomorrow the labor of only 10 people is needed to support 100 people, then why are we making those other 90 people work? If we can’t provide work for them, what are they do to?

The only reason we do not print the money required to do all the things that the government wants to do right now is GOP obstructionism. Printing limitless amounts of cash will never have any effect on the value of the dollar.

You’re right about GOP obstructionism. I often wonder when the conservative prediction of hyperinflation will come to pass?

Or, to put it in simpler terms, if a hundred years ago the labor of 100 people was needed to support 100 people, and tomorrow the labor of only 10 people is needed to support 100 people, then why are we making those other 90 people work? If we can’t provide work for them, what are they do to?

Or, perhaps re-thinking this question a bit, why are we making them (a) work so they can (b) get money which they will then (c ) exchange for goods and services? Can we just get rid of intermediate step (b)?

I don’t believe it’s possible for most people to save for an adequate retirement

I think people can put away savings; however, there are two problems to this:

1) People will have to accept a lower standard of living

2) The economy will have to adjust to the hit saving, not spending.

As for retirement, I”m 60 and I’m not yet ready to retire but I would like to work less. A job-sharing would be wonderful but no one seems to get on board with that paradigm. Too bad, since there are others I work with would go for that also.

I often wonder when the conservative prediction of hyperinflation will come to pass?

I don’t know but I am sure that if it does you will find a way to blame conservatives and hold dem monetary policy blameless.

The fact is that dramatic monetary expansion has always lead to rampant inflation in other cases. The question is whether the dollar’s place as the currency of international trade protects it somewhat. Certainly the economic stagnation that we have been experiencing has prevented inflation from taking off. Even the Fed acknowledges that monetary expansion is inflationary. Pretending that it is not or that it has no limits is foolish in the extreme.

I’ll see if I can dredge up the link to my old post. The questions are what level of income they expect to derive from the savings, how they’d need to live to save that much, and the run-on economic impact of that change in behavior on the part of most people. The shorthand I used for my conclusion is that most people can’t save for their retirements.

The additional factor that should be taken into account is risk. The higher return you must realize, the greater the risk you must accept. Very low rates of return on safe investments require an incresaing number of people to rely on riskier investments which will in turn mean that more of them will lose.

@Dave Schuler: I think you’re probably right. I was reflecting from my own little bubble where I have saved most of my life and lived below my means. Fortunately, my means was pretty good to start with.

I lost my job as a manufacturing engineer in 2001 because of outsourcing – my job went to China. I was 56 at the time and there was little if any possibility that I could find another job. I was not alone. I was lucky – I had lived a spartan life and had no dependents so I had money in savings. I was also able to do some consulting and I managed to survive until Social Security kicked in at 66 but I had no health insurance until I became eligible for Medicare at 65. If you lose your job in your late to mid 50s the odds are you will not be able to find another one.
If you have a very physical job you can’t really work much past 60. That includes public employees like fire fighters and policeman. It would also include those in the construction trades and as James said coal miners.
Retirement age is not a one size fits all.

if a hundred years ago the labor of 100 people was needed to support 100 people, and tomorrow the labor of only 10 people is needed to support 100 people, then why are we making those other 90 people work? If we can’t provide work for them, what are they do to?

We have already seen that. It doesn’t take nearly the number of people to run a farm, or a steel mill, or a car factory, etc. Heck, automobile manufacture is a great example when you look at how Ford revolutionized manufacturing with the assembly line expanding the productivity of the work force, and then how automation has changed the need for human labor.

What happens is that people invent other things to do. I’m a big believer that people generally dislike being idle and that they desire to make their lives better. People will create other things to build and do and people will remain employed.

And the reality is that over the next century UN population estimates are that world population will start to decline. The real question is how do you maintain an expanding economy with declining population. That isn’t an easy thing to do. Population growth is one of the main drivers of economic expansion.

The shorthand I used for my conclusion is that most people can’t save for their retirements.

Nor is saving necessary good for the economy as a whole (however rational it may be for the individual), due to the Paradox of Thrift. As Dr. Krugman so often notes, your spending is my income, and vice versa. The more people save, they less they spend, so the less economic activity is generated for the stores, restaurants, theatres etc. they would otherwise have spent their money at.

What happens is that people invent other things to do. I’m a big believer that people generally dislike being idle and that they desire to make their lives better. People will create other things to build and do and people will remain employed.

Well, yes and no. People will invent other things to do — but not necessarily things that other people will pay them for, or employ them to do. I can spend all my time composing sonatas or writing novels or learning calligraphy or rebuilding motorcycle engines or translating Swedish etc. — but no one’s going to pay me for that, not in an age of iTunes and 3D printers and at-home printing and Google Translate.

You don’t just have to find something to do – that’s the relatively easy part. You have to find something to do that (a) people will pay you a living wage to do, and that (b) can’t be done faster and cheaper by a computer, an app, a drone or an algorithm.

And, you know, you shouldn’t have to be a genius who can always anticipate and stay one step ahead of larger societal, economic and technological trends just to have a job….

I have thought for some time now that there should be a way that people could pull some of their Social Security and invest it. With do many free resources for investing today, this would not be out of reach for most people. This would be especially advantageous for young people, who could see a good amount to help with retirement. I know a few people who have invested over the years using the internet. They have made some money, not huge amounts, but enough to help.
This is an idea that has been around for a while, but doesn’t seem to get anywhere. It would be optional, and be limited to a certain amount, like 20%.

@Dave Schuler: “Do we really want to be a country in which relatively poor young people of Hispanic descent are being taxed at confiscatory rates to pay for the retirements of elderly people of western and northern European descent?”

So I guess the idea of restoring tax rates on the super rich to what they were forty years ago is now completely off the table? Why would we raise taxes on the young and struggling — why not take it back from the class that has appropriated all of the nation’s increased wealth for decades?

@Tyrell: An individual investor lacks access to timely information about arbitrage opportunities and the ability to take sufficient advantage of them. Additionally, truly lucrative investment opportunities are only available to professional investors like pension funds, insurance companies, and the independently wealthy.

Unless you go with a very low fee index fund or ETF, your IRA and 401(k) are subsidizing the lifestyles of your stockbroker or mutual fund manager before you start to see any ROI. A defined benefit option is almost always going to work out better for an individual non-wealthy investor than a definite contribution option.

A German’s retirement contribution is about 9.5% of his or her annual income, assessed on incomes up to about $98,000, compared to the American 6.2% assessed on incomes up to $117,000. In both countries the employer contributes an equal amount. In view of this, I’d be surprised if the German social security system weren’t in better shape financially than ours. Unfortunately, increasing our contribution to Social Security would be difficult due to our high degree of income inequality.

In response to an earlier comment about the difficulty of saving for retirement at current interest rates, I’d like to give some advice: if you want to save for retirement without incurring any risk, you’re setting yourself up for a dismal old age. Inflation is a killer, and unless you’re willing to take some risk by investing at least half of your savings in the stock market, preferably in index funds, you’re going to see your money melt away. I’ve seen gruesome examples of this in the older generation of both my family and my wife’s.

“I have thought for some time now that there should be a way that people could pull some of their Social Security and invest it.”

What happens to the money needed to pay current recipients? We are rapidly spending off the surplus we accumulated in anticipation of the Baby Boomers’ retirement, and it will be all spent in the next decade. Taking up to 20% of new revenues for current employees to invest will accelerate that further.

I don’t know what’s on or off the table. However, the history of raising marginal tax rates on the highest income earners is that you don’t raise a lot of additional revenue that way. Back in the 50s and early 60s when the top marginal rate 91%, federal income taxes raised about 7.7% of GDP in revenues. In the 60s through early 80s when the top rate was 70% it raised 8% of GDP in revenues.

If you feel the need to raise the top marginal rates for symbolic reasons, raise away for all I care.

If you want to raise additional revenues, those will need to be paid by people who have no choice but to pay them, which means people earning a lot less.

I see many seniors knocking back martinis at the Yacht Club and complaining about their taxes and the rising cost of a round of golf.

At some point, the country needs to come to grips with the fact that being old does not, ipso facto, make you part of a disadvantaged class. Most of the wealth in the US is held by the old. Old people who are struggling to get by are not struggling because they are old — they are struggling because they lack wealth and can’t work.

@DrDaveT: That is true. I have not understood this trend at all. While most still downsize once the kids are out (and grandkids, which is another trend today), I have seen more than a few go out and get houses much too large for two people. Why do they need all of that space ? What are they going to do with it ?